The US could choke it, or let the IMF save it. But misplaced priorities take Pakistan to the edge of an economic precipice
Rubin's strong statement last week disheartened India's external affairs ministry mandarins and dashed hopes of a speedier solution to the Kargil flare-up. But despite the disappointment, finance minister Yashwant Sinha said the tradition followed by the two countries of backing each other at multilateral fora would continue. India, of course, is pinning its hopes on the Fund finally coming to a strong decision on its own.
Finance ministry sources said India had backed Pakistan's loan programme before the Kargil crisis. In January, the Fund cleared the resumption of its three-year financing package equivalent to sdr 1,137.3 million, or about $1,558 million, cleared in October '97-the loan was blocked by the G-8 states after the N-tests. But, while India would have been happy if the loan was blocked, Sinha said it'd prefer to remain neutral and abide by the IMF decision. "Pakistan has messed up its economy and put the loan in jeopardy," said a ministry source.
In London, the Financial Times reported that senior Pakistan government officials are worried about the prospect of US armtwisting the Fund. Mushtaq Khan, chief economist at a prominent Pakistani bank, was quoted saying that "if the comfort of IMF tranche is taken away, then sovereign lenders could come back to reopen negotiations."
Can the US pressure IMF?
The US is the Fund's largest shareholder, and capable of pulling off G-7 support in its favour. Should it do so against Pakistan, the effect it would have on the feeble economy could be devastating, international financial analysts agree. Not because of the actual cash Pakistan is slated to receive from the Fund, which is indeed quite huge, but more because of what an IMF involvement represents for global creditors.
Pakistan is currently on two simultaneous IMF programmes-an Extended Funding Facility (eff) of sdr 454.9 million ($623 million) and an Enhanced Structural Adjustment Facility (esaf) of sdr 682.4 million ($935 million). sdr stands for Special Drawing Rights and is the IMF currency. One sdr is equivalent to about $1.4. The virtually-free esaf sets strict macro-economic, fiscal and structural targets for the country, while eff is for tiding over balance of payments crises and is much costlier.
In January, the IMF also extended Pakistan one-time funds of sdr 352.7 million via a Compensatory and Contingency Financing Facility to bring it back from the edges of bankruptcy in the wake of the sanctions. Following the flow of funds, Pakistan managed to save its face in the international circles; it had already been forced to reschedule several repayment obligations.
What happens if IMF pulls out?
If the IMF programme were to derail, the country's debt service obligations would go haywire, says Ashok Bhatia, primary sovereign analyst for Pakistan at Standard & Poor's in London. Pakistan has about $35 billion in total outstanding debt, he points out, and international creditors could potentially demand repayment on loans they agreed to reschedule. The Paris Club, a grouping of oecd and other governments, agreed in January this year to reschedule $3.3 billion of principal and interest due in the period to end-2001 under strict conditions, Bhatia says.
It's largely the rescheduling of about $3.3 billion in Paris Club debt and around $500 million in London Club obligations-money owed to international commercial banks-that has given Pakistan some room to breathe, says Kal Wajid, senior economist in the Asia department of the Washington-based Institute of International Finance. Because these agreements eased some of the pressure on Pakistan, the country's foreign currency reserve position could improve since January to its current $1.6-billion range. Should the IMF programme fall through, the Paris Club agreement is unlikely to be revoked, Wajid says, but bilateral deals with individual governments under the same umbrella may be delayed.
A more immediate and alarming consequence would be a halt in loans from other multilateral lenders. "The importance of an IMF programme is in terms of the other resources it unlocks," Wajid says. "All the other multilaterals rely on the Fund's opinion, and money can easily stop coming from them." The World Bank and the adb have jointly provided Pakistan with close to $1 billion on a yearly basis.
The biggest importance of IMF loans for Pakistan is that they are injected directly into a country's foreign exchange reserves, as opposed to other multilateral loans that are programme-specific and spread out over a longer time period. Given the weakened state of the Pakistani economy, and the added strain the ongoing conflict places upon it, fresh IMF funds would go a long way, says Teresita Schaffer, director of the South Asia program at the Washington-based Center for Strategic and International Studies. If the multilateral agency were to hold back on any forthcoming disbursements, the Pakistani economy is sure to decline even further in the near-term, she says, and will be in a dangerous position with respect to its balance of payments.
Is Pakistan meeting IMF conditions?
Under the current programme, the fourth review of the Pakistani economy is scheduled for August-September, following which Pakistan is slated to receive about $200-300 million in cash. On May 25, the Fund completed its third review and cleared another $51 million of credit tranche under eff. The country is entitled to draw $459 million more under eff up to October 2000.
The hostilities in Kargil have shed negative light on Pakistan, Schaffer says, but it is more likely that the IMF will judge the country incapable of meeting the loan conditionalities. In the light of this, the Fund could deliberate whether or not to disburse the next tranche of funding, she says, and this could set the program off course. Fareed Mohamedi, sovereign analyst for Pakistan at Moody's Investors Service in New York, which recently downgraded Pakistan to high-risk, adds that with or without forthcoming IMF funds, the Pakistani economy is fraught with problems, which make it difficult for the country to meet IMF targets.
The IMF objectives for Pakistan are, for one, to cut spending and restrain its bulging budget deficit, forecast to reach 4.7 per cent of gdp this year. It also pushes for increased revenues through direct and indirect taxes. This is the hardest part for Pakistan, Mohamedi says, and is an area where the government has made no progress. While the slump in world oil prices helped slightly by allowing Pakistan to increase earnings via surcharges on petroleum products, higher oil prices since April have undermined earlier success in raising the revenue income. A government's inability to collect enough revenues is a major flaw in any economy, Mohamedi says, and places it in a precarious position.
Failures to meet this and other IMF targets could lead to delayed disbursements, Bhatia agrees. Yet, he points out, Pakistan appears to have been meeting most of the IMF-prescribed fiscal targets since January. While approving the eff tranche in end-May, the IMF deputy MD said that policy implementation had remained largely in line with programme commitments since the last review in January. This is also because the current programme is "friendlier" than its predecessors and has goals easier for Pakistan to fulfill. However, "it's still a challenge, and no economist will disagree that it'll be very difficult for Pakistan to meet all targets throughout the programme period, which ends on September 30, 2001", he says.
Is the IMF credible?
The Fund, of course, denies any move, even talks, to stop funds to Pakistan. The event of this happening would more likely be tied to Pakistan falling short of prescribed programme targets, than its refusal to withdraw troops from Kargil, says an IMF spokesperson. But Pakistan has already qualified for that status, say experts in India and abroad. They feel that IMF is already yielding too much to Pakistan under US pressure, a political move which may prove economically unsound.
Two days after IMF had approved the eff tranche, says Sanjaya Baru, professor at icrier, an Indian thinktank for international economic relations, Pakistan raised its defence budget by 11 per cent, making defence spending cross 6 per cent of gdp compared to 2.5 per cent for India last year. When India had taken the loan in the early '90s, Baru argues, the then finance minister Manmohan Singh was expected to apprise IMF of the controlled defence expenditure when the Fund team came every four months for periodic reviews.
Even analysts at Credit Lyonnais Securities Asia (clsa) have been highly critical of the way IMF has tended to overlook Pakistan's wayward ways. In a recent review of the Asian economies, the clsa has said: "The IMF-Pakistan agreements have a low credibility, not surprising following the repeated collapse of previous governments... The lack of political will (in Pakistan) to comply with tough IMF conditionality is well-known. Our concern is that the IMF may have lost sight of its objective, which is to get the derailed economy back on track."
Major among the IMF loan conditionalities laid down in January this year are to raise growth rate of real gdp to 5.5-6 per cent, an external current account deficit of 1.5 per cent in 2001-02, and stabilisation of the public sector debt to gdp ratio. None of these seem to be happening yet. And if the threat of an IMF pullout isn't credible, fiscal reforms may never happen, affecting the rest of the global creditors.
With IMF's credibility at an all-time low in global financial circles, it's clear the US holds the key to Pakistan's future. The answer to how far they'll go in throwing good money after bad lies in the future.